Reed

Filing 10

ORDER Affirming Bankruptcy Court's April 25, 2017, Order Assessing Sanctions Against Appellants. Signed by District Judge Matthew F. Leitman. (HMon)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
KEEPER OF THE WORD
FOUNDATION, et al.,
Case No. 17-cv-11660
Hon. Matthew F. Leitman

Appellants,
v.
CHARLES H. BROWN TRUST, et al.,
Appellees.
______________________________________/

ORDER AFFIRMING BANKRUPTCY COURT’S APRIL 25, 2017,
ORDER ASSESSING SANCTIONS AGAINST APPELLANTS
This appeal arises out of an adversary proceeding in the Chapter 7 Bankruptcy
of Debtor Gregory Reed. In that proceeding, the Bankruptcy Court entered an order
imposing sanctions (the “Sanctions Order”) on Appellants Reed, Keeper of the Word
Foundation (“KWF”), Mic-Arian Corporation (“MAC”), the Gregory J. Reed
Scholarship Foundation (“the Scholarship Foundation”), James Harris, and the Law
Offices of James Harris (the “Harris Law Office”). (For ease of reference, the Court
will refer to all of the Appellants except for Reed as the “Reed Affiliates.”) Reed
and the Reed Affiliates now appeal the Sanctions Order. (See ECF #1.) For the
reasons explained below, the Sanctions Order is AFFIRMED.

1

I
Reed filed for bankruptcy under Chapter 7 of the Bankruptcy Code on August
28, 2014. On December 17, 2015, the Bankruptcy Court entered an order in which
it held, among other things, that (1) certain assets in KWF’s possession were
property of Reed’s bankruptcy estate and (2) KWF needed to turnover the assets to
the estate’s Trustee, Kenneth Nathan (the “Turnover Order”). Those assets included
a 50-percent interest in real property located at 1201-1209 Bagley in Detroit,
Michigan (the “Bagley Property”). KWF appealed the Turnover Order to this Court,
and this Court affirmed. See Reed v. Nathan, 558 B.R. 800 (E.D. Mich. 2016), aff’d,
No. 16-2685 (6th Cir. Sept. 7, 2017).
In August 2016, the Bankruptcy Court authorized Nathan to employ
Dwellings Unlimited, LLC (“Dwellings”) as a real estate broker to market and sell
the Bagley Property. Nathan and the co-owner of the Bagley Property, the Charles
H. Brown Trust (the “Trust”), eventually agreed to sell the property, and the
Bankruptcy Court entered an order authorizing the sale.
Thereafter, KWF, MAC, and the Scholarship Foundation filed an action
against, among others, Dwellings, the Trust, and the Brown Companies (“BC”) in
the Wayne County Circuit Court seeking to stop the sale of the Bagley Property and
partition that property. Harris and the Harris Law Office represented KWF, MAC,
and the Scholarship Foundation in that state-court action.
2

Dwellings, the Trust, and BC removed the state-court action to the Bankruptcy
Court, and it was assigned adversary proceeding case number 17-04125. KWF,
MAC, and the Scholarship Foundation objected to the removal. The Bankruptcy
Court overruled that objection, retained jurisdiction, and declined to remand to state
court.
On March 6, 2017, Dwellings, the Trust, and BC served Reed and the Reed
Affiliates with a “safe harbor” letter and draft sanctions motion pursuant to
Bankruptcy Rule 9011.1 (See ECF #3 at Pg. ID 210.) In the “safe harbor” letter,
Dwellings, the Trust, and BC said that if the Complaint was not withdrawn, they
would file the sanctions motion in the Bankruptcy Court. (See id.) Neither Reed nor
the Reed Affiliates responded to the “safe harbor” letter, and the Complaint was
never withdrawn.
Dwellings, the Trust, and BC then filed two motions in the Bankruptcy Court:
(1) a motion to dismiss the Complaint and (2) a motion to impose sanctions against
Reed and the Reed Affiliates. The Reed Affiliates were served with the two motions
through the Bankruptcy Court’s electronic filing system. However, Reed was not a
named party to, nor counsel in, the adversary proceeding, and thus he did not receive
the motions through the Bankruptcy Court’s electronic filing system.

And

1

Dwellings, the Trust, and BC served the “safe harbor” letter and draft sanctions
motion on Reed personally even though he was not a party to the underlying
adversary proceeding.
3

Dwellings, the Trust, and BC did not personally send either of the motions to Reed
by regular mail or otherwise. Neither Reed nor the Reed Affiliates filed any response
to the motion to dismiss or the motion for sanctions.
On April 25, 2017, the Bankruptcy Court entered two orders granting the
motions: an order dismissing the Complaint in the adversary proceeding and the
Sanctions Order. In the Sanctions Order, the Bankruptcy Court awarded Dwellings,
the Trust, and BC “all reasonable attorney fees and expenses in the prosecution of
their sanctions motion.” (ECF #3 at Pg. ID 203.) The Bankruptcy Court issued these
sanctions against Reed and the Reed Affiliates “jointly and severally.” (Id. at Pg. ID
204.) The Sanctions Order further reflected the Bankruptcy Court’s belief that Reed
had “been served” with the sanctions motion. (Id. at Pg. ID 202.)
The Reed Affiliates were served with the Sanctions Order through the
Bankruptcy Court’s electronic filing system. However, because Reed was not a
named party to, nor counsel in, the adversary proceeding, he did not receive
electronic service of the Sanctions Order through the court’s system. Instead,
counsel for Dwellings, the Trust, and BC mailed the Sanctions Order to Reed on
April 26, 2017. (See adversary proceeding at Dkt. #30.)
On May 9, 2017, the Reed Affiliates filed objections to the Bankruptcy
Court’s two orders, and Reed filed a separate objection to the orders.

4

The

Bankruptcy Court overruled the objections in written orders entered on May 15,
2017.
Reed and the Reed Affiliates timely appealed the Sanctions Order to this
Court. (See ECF #1.)
II
The Reed Affiliates argue that the Bankruptcy Court erred when it entered it
sanctions against them. The Court disagrees.
The Reed Affiliates were each directly served with the sanctions motion. Yet
they did not file any response to that motion. And they have not shown that the
Bankruptcy Court erred when it granted the unopposed motion. Nor have the Reed
Affiliates established that the Bankruptcy Court should have sustained their
objection to the Sanctions Order. They simply have not shown any error in the
Bankruptcy Court’s decisions with respect to that order.
On appeal, the Reed Affiliates attempt to excuse their failure to respond to the
sanctions motion. They argue that they did not believe they needed to respond to
the motion because the motion used the wrong case number on the caption of the
motion, and they assumed that the Bankruptcy Court would strike the motion due to
that error.
But the Reed Affiliates never asked the Bankruptcy Court to strike the motion,
and the Bankruptcy Court never did so. Moreover, the Reed Affiliates cite no
5

authority to support their assertion that a party may reasonably decline to respond to
a pending motion based upon the party’s own assumption that the motion will be
stricken.
Furthermore, the error on the case caption was immaterial. The sanctions
motion listed the correct parties and correct court. However, there was a minor error
in one of two case numbers listed in the caption of the motion. Those two case
numbers were: the number assigned to Reed’s bankruptcy and the number assigned
to the adversary proceeding in which the sanctions were sought. The number listed
for the adversary proceeding was correct. And the number for Reed’s bankruptcy
was off by only a single digit – Dwellings, the Trust, and BC listed the bankruptcy
case number as 14-43838 instead of 14-53838. Importantly, the Bankruptcy Court’s
electronic filing system delivered the motion to the Reed Affiliates with a document
trailer at the bottom of each page that clearly identified the motion as having been
filed in the adversary proceeding. Under these circumstances, the Reed Affiliates
could not have had any uncertainty as to the proceeding in which the motion was
filed. They had to have known, or reasonably should have known, that the motion
was filed in the adversary proceeding. They had no justification for ignoring the
sanctions motion and assuming that the Bankruptcy Court would ultimately strike
that motion.

6

The Reed Affiliates also argue on appeal that the Bankruptcy Court erred
when it concluded that Dwellings, the Trust, and BC had complied with the 21-day
“safe harbor” rule included in Bankruptcy Rule 9011. The Court disagrees. Under
Rule 9011, a “motion for sanctions may not be filed with or presented to the court
unless, within 21 days after service of the motion (or such other period as the court
may prescribe), the challenged paper, claim, defense, contention, allegation, or
denial is not withdrawn or appropriately corrected.” Bankr. R. 9011(c)(1)(A). Here,
Dwellings, the Trust, and BC served the Reed Affiliates with a “safe harbor” letter
and draft sanctions motion on March 6, 2017. (See ECF #3 at Pg. ID 210.)
Thereafter, the Complaint was not withdrawn, and more than 21 days later, on April
4, 2017, Dwellings, the Trust, and BC filed their motion for sanctions. That filing
complied with the Rule 9011 “safe harbor” provision, and the Bankruptcy Court did
not enter sanctions in violation of that rule.
III
Reed attacks the Sanctions Order on the same grounds as the Reed Affiliates
and on one additional ground – that the Bankruptcy Court should not have granted
the Sanctions Motion against him because he was not served with the motion and
because he was neither a party to, nor counsel in, the adversary proceeding. The
Court concludes that the Bankruptcy Court properly sanctioned Reed.

7

First, to the extent that Reed’s arguments on appeal mirror those presented by
the Reed Affiliates, the Court rejects them for the reasons explained above.
Second, while Reed was not served personally with the sanctions motion,
service on one of the Reed Affiliates, KWF, amounted to service on Reed. That is
because the Bankruptcy Court has already determined – and this Court has affirmed
– that Reed so dominated KWF and so extensively used its assets as his own that
KWF is effectively Reed’s alter ego. See Reed, 558 B.R. at 807, 816-17 (citing In
Re: Reed, Case No. 14-5838, Dkt. #344 at 31-32 (E.D. Mich. Bankr. Dec. 17, 2015)).
And service on Reed’s alter ego is service on Reed. Cf., e.g., Bally Export Corp. v.
Balicar, Ltd., 804 F.2d 398, 405 (7th Cir. 1986) (explaining that service on a
corporation’s alter ego is service on the corporation); I.A.M. Nat’l Pension Fund v.
Wakefield Ind. Inc., 699 F.2d 1254, 1259 (D.C. Cir. 1983); Delta Constructors, Inc.
v. Roediger Vacuum, GmbH, 259 F.R.D. 245, 249 (S.D. Miss. 2009).2 Thus, Reed
cannot escape the Sanctions Order on the ground that the Sanctions Motions was not
directly served upon him.

2

The cases cited above were addressing service under Federal Rule of Civil
Procedure Rule 4, but they are nonetheless instructive. Bankruptcy Rule 9011
provides that that a sanctions motion “shall be served as provided in Rule 7004.”
Bankr. R 9011(c)(1)(A). And Bankruptcy Rule 7004 incorporates the applicable
provisions of Federal Rule of Civil Procedure 4. See Bankr. R 7004(a)(1) (“Rule
4(a), (b), (c)(1), (d)(1), (e)-(j), (l), and (m) [of the Federal Rules of Civil Procedure]
appl[y] in adversary proceedings”).
8

Third, Reed was subject to sanctions even though he was not a named party
to, nor counsel in, the adversary proceeding. Since KWF is Reed’s alter ego, the
Bankruptcy Court properly held him responsible for KWF’s vexatious litigation
under Bankruptcy Rule 9011. See, e.g., Aldmyr Systems, Inc. v. Friedman, 215
F.Supp.3d 440, 464-67 (D. Md. 2016) (imposing sanctions under Federal Rule of
Civil Procedure 11 on non-party sole shareholder of corporate party where
corporation was shareholder’s alter ego), aff’d 679 Fed. App’x 254 (4th Cir. 2017).3
Moreover, the Bankruptcy Court had the inherent authority – apart from Bankruptcy
Rule 9001 – to sanction Reed for his direction of KWF’s vexatious litigation even
though Reed was not a party. See In Re Rainbow Magazine, 77 F.3d 278 (9th Cir.
1996) (recognizing inherent authority of bankruptcy courts to impose sanctions upon
non-parties who participate in vexatious litigation conduct). Thus, Reed is not
entitled to relief from the Sanctions Order on the ground that he was not a named
party to the adversary proceeding.
Finally, Reed’s own conduct in the Bankruptcy Court underscores the
propriety of sanctioning Reed for KWF’s vexatious litigation conduct. When Reed
filed his objection to the Sanctions Order, he presented arguments on behalf of KWF

3

“Bankruptcy Rule 9011 is essentially identical to Rule 11, and [] courts have held
that cases construing Rule 11 are applicable to Bankruptcy Rule 9011.” Munn v.
Michigan Bank Port Huron, 924 F.2d 1058 (6th Cir. 1991) (Table), 1991 WL 11266.

9

(and on behalf of the other Reed Affiliates). That Reed attempted to represent KWF
in his personal objection (filed in his individual capacity and not as counsel) shows
that Reed identifies with, and closely aligns himself with, KWF. And that is one
additional reason that Reed may properly be held responsible for KWF’s vexatious
conduct.
IV
For the reasons stated above, IT IS HEREBY ORDERED that the Sanctions
Order is AFFIRMED.

s/Matthew F. Leitman
MATTHEW F. LEITMAN
UNITED STATES DISTRICT JUDGE

Dated: February 12, 2018

I hereby certify that a copy of the foregoing document was served upon the
parties and/or counsel of record on February 12, 2018, by electronic means and/or
ordinary mail.
s/Holly A. Monda
Case Manager
[phone] 

10